Alpha Geek
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Analysis of long-term debt Assume that Home and Office City, Inc., provided the following comparative data concerning long-term debt in the notes to its 2014 annual report (amounts in millions):
Required:
a. As indicated, Home and Office City’s 3¼% Convertible Subordinated Notes were converted into shares of common stock in October 2013. How many shares of stock were issued in conversion of these notes?
b. Regarding the 6½% Senior Notes, Home and Office City, Inc., also disclosed that “The Company, at its option, may redeem all or any portion of the Senior Notes by notice to the holder. The Senior Notes are redeemable at a redemption price, plus accrued interest, equal to the greater of (1) 100% of the principal amount of the Senior Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to maturity.” Redeemable fixed-rate notes, such as those described here, are similar to callable term bonds. Thinking of the 6½% Senior Notes on this basis, would it have been possible for Home and Office City, Inc., to redeem (“call”) these notes for an amount
1. Below face value (at a discount)?
2. Above face value (at a premium)?
3. Equal to face value (at par)?
What circumstances would have been most likely to prompt Home and Office City to redeem these notes?
c. Recall from the discussion of Cash and Cash Equivalents in Chapter 5 that commercial paper is like an IOU issued by a very creditworthy corporation. Home and Office City’s note disclosures concerning commercial paper reveal that “The company has a backup credit facility with a consortium of banks for up to $800 million. The credit facility contains various restrictive covenants, none of which is expected to materially impact the company’s liquidity or capital resources.” What do you think is meant by this statement?
d. What other information would you have wanted to know about Home and Office City’s “Capital Lease Obligations” when making an assessment of the company’s overall liquidity and leverage?
e. Regarding the “Installment Notes Payable,” what is meant by “interest imputed at rates between 5.2% and 10%”?
f. Why do you suppose that Home and Office City’s “Unsecured Bank Loan” was immaterial in relation to the company’s total long-term debt?
g. Note that the “current installments” due on Home and Office City’s long-term debt were immaterial in amount for both years presented. Based on the data presented in this case, explain why this is likely to change over the next five years.